Focus Ukraine: On the Eve of the Summer Phase of the Military Campaign, Are European Partners Ready to Provide Long-Term, Intensive Support?

Ihor Petrenko, Dmytro Levus, Petro Oleshchuk, Oleksiy Kushch

19 mins - 5 de Marzo de 2024, 07:00

Agenda Pública and United Ukraine Think Tank present Focus Ukraine, a weekly article series analysing how the military conflict in Ukraine and the political and economic situation in the country will evolve. The articles are written by Ihor Petrenko, Dmytro Levus, Petro Oleshchuk and Oleksiy Kushch, experts of the United Ukraine Think Tank.

After the end of the winter period, Ukraine switched to active defense. The enormous pressure of economic problems, the demographic crisis, and the increasing pressure of the Russian occupiers are forcing Kyiv to carefully dose its resources and weapons, distributing them with an eye toward a long confrontation. Will partners be able to keep up with the assistance, and do the increasingly bold statements by European leaders indicate that they are aware of the existential threat posed by the Kremlin and the impossibility of negotiating with a terrorist state?
The end of the second full winter in the context of a full-scale war is an important milestone for Ukraine. It is important because winter is a special period that not only creates difficulties due to weather conditions and short daylight hours, but also opens a certain "window of opportunity" caused by the vulnerability of the enemy's infrastructure and troops in the cold and complicated logistics. And the better prepared party can take advantage of this. In the case of the aggressor country, it is also a persistent Russian myth, widespread in the West, about the allegedly special ability of Russian troops to fight in winter. In folklore, this myth is transformed into stories about "General Frost," who allegedly helps Russia and helped freeze the troops of Napoleon and Hitler near Moscow. It is safe to say that Russia has clearly failed to achieve its strategic goals in this winter's war.

Ukraine's defense forces had to retreat from Avdiivka and some other settlements. But it is undeniable that the Russians suffered enormous losses in manpower and equipment in these long battles. We are talking about tens of thousands of soldiers and hundreds of tanks and various armored vehicles. Obviously, Russian troops are currently trying to continue their offensive in those areas and prevent Ukrainian defenders from gaining a foothold on new defense lines. But it is clear that the Ukrainian Defense Forces have maintained their combat capability and are active. Russia tried to use the winter to strike at Ukraine's energy and infrastructure and at least repeat, and ideally expand, last year's scenario of plunging Ukraine into darkness, but this did not happen. There were no blackouts or even power outages similar to last year's. At the same time, Ukraine's air defense system successfully repelled a massive combined attack by the Russians, which included hypersonic missiles in addition to the full range of previously used weapons. It can be concluded that the Zircon hypersonic missile, part of Russia's aggressive propaganda, a weapon positioned as "unparalleled," does not meet the characteristics claimed by the Russians. The reason for Russia's failure, which subsequently led to the refusal to continue active attacks on Ukrainian infrastructure, is the expansion of the combat capabilities of Ukraine's air defense and good preparation for possible losses of Ukrainian energy with the assistance of partners.

Throughout the winter, Ukraine continued to be active in the maritime theater of operations. During this time, Russia irrevocably lost three important ships. The Ivanovets missile boat and two large amphibious assault ships: "Novocherkassk and Caesar Kunikov. In the case of the Novocherkassk, it was destroyed by guided missiles while unloading ammunition in the port of Feodosia, while the Ivanovets and Caesar Kunikov were destroyed by Magura marine drones, a weapon developed in Ukraine, and the methodology for its use is also Ukrainian. The Ivanovets is important because it carries guided anti-ship missiles. In turn, the large amphibious assault ships Novocherkassk and Caesar Kunikov became, respectively, the fifth and sixth large amphibious ships to be hit by Ukraine. When planning a full-scale aggression against Ukraine, Russia was reinforcing this particular class of ships in the Black Sea, as it expected to use them to land amphibious assault forces in southern Ukraine. The significance of these ships for the invaders even increased when it became apparent that landings were impossible due to the strong coastal defense built by Ukrainian troops. They are now being actively used for military transportation, especially because of fears in the Kremlin about the vulnerability of the bridge to Crimea across the Kerch Strait. Ukrainian activity at sea is not limited to strikes on the Russian occupiers' ships. The Special Operations Forces and the Defence Intelligence of Ukraine continue to be active in the Black Sea. This became known to the general public because of the battle when the Special Operations Forces suffered losses on the Tendra Spit on February 28. Soldiers of the 73rd Naval Special Operations Center were killed there, as reported by the Special Forces Command. It is clear that this is only part of the work, as throughout the winter there were reports of successful actions by Ukrainian special forces on oil rigs in the Black Sea off the coast of Crimea.

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Winter was a bad time of year for Russian aviation. For example, during this period, it lost two A-50 long-range radar detection and control aircraft. These aircraft are extremely important for air situational awareness, planning, targeting of strike aircraft, and air defense detection. There are very few of them. After the loss of the first one, the Russians moved the border of patrolling over the Azov Sea, but this did not save them from destroying the second one, at an even greater distance, over the Krasnodar Territory of the Russian Federation. Moreover, it happened on a significant day for Russians, February 23, on which they have been celebrating the military holiday "Defender of the Fatherland Day" since Soviet times. And for several days now, the A-50s have not risked flying at all. The irony is that on February 21, the Russian dictator Putin, who is emphatically Orthodox, presented his air force with Orthodox icons for protection. And this did not help, as expected. There was an increase in losses of Russian strike aircraft, mainly Su-34 fighter-bombers and Su-35 fighters and one Ka-52 attack helicopter, in February, especially in the last week of the month. This is due to the active use of aircraft to support the advance of Russian troops on the ground, forcing their pilots to enter the air defense zone. It was during this period that the assault on Avdiivka took place. At the same time, there is evidence of the destruction of Russian aircraft at a considerable distance from the front line, and it is not just the two A-50s mentioned above. Experts are debating which weapons the Ukrainians used to achieve this. Some have suggested that it could have been the Soviet S-200 system, which has been upgraded by the Ukrainians. The cost of the aircraft lost by Russia in the last week of February alone exceeded one billion dollars. 

The Ukrainian Defense Forces have a certain style of using multiple launch rocket systems "HIMARS" against the invaders' manpower in the rear. On the evening of February 27, the third such strike took place in eight days. In Olenivka, Donetsk region, the 155th Separate Marine Brigade of the Russian Armed Forces came under attack, the unit of which was gathered for an award ceremony. It is known that as a result of the strike, two missiles from the HIMARS system immediately killed at least 19 occupants, and 12 more were injured. Among the destroyed occupants are the deputy brigade commander and several other officers, the brigade commander is probably wounded. The Defence Intelligence of Ukraine assesses the operation as "perfectly worked out".

It is possible to reduce Russia's combat capability by cutting off its ability to obtain funds for warfare. Since their most powerful source is the supply of Russian oil refining products to various countries around the world, Russian oil refineries have become the obvious target of powerful strikes this winter. And not only in the South of Russia, as it was before, but also on the Baltic coast (refinery in the port of Ust-Luga) and on the Volga. This led to a certain result: the Russian government announced a six-month export restriction on petroleum products. In addition, the enterprises of the Russian military-industrial complex were hit hard. Among them was the Tambov Powder Plant, which was successfully attacked in mid-January. And on February 24, several drones struck the Novolipetsk Metallurgical Plant, which is one of the largest metallurgical plants in Russia, working for the military-industrial complex and fulfilling a large number of government orders. Its raw materials are used to make weapons and ammunition. The entire production process of the metallurgical plant was stopped for a long time. The plant belongs to oligarch Lisin, one of the three richest men in Russia, who is close to Russian dictator Putin. On the night of February 29 to March 1, explosions occurred in the Nizhny Novgorod region, where three drones attacked a plant in the city of Dzerzhinsk that produces explosives and equips almost all types of ammunition. All of these strikes are carried out several hundred kilometers away from Ukraine. In some cases, even more than a thousand, which indicates the growing capabilities of Ukrainian UAVs, which are not only able to fly such a distance but also to overcome Russian air defense. 

In the last week of February, Russia committed another war crime. On February 24, Russian troops shot at least seven Ukrainian soldiers near Bakhmut, who were captured, and there is video. We need to record another violation of international humanitarian law by Russia. These crimes are a system for Russia, part of its policy. Ukraine's Ombudsman Dmytro Lubynets appealed to the International Committee of the Red Cross and the UN to record and publicly acknowledge that the Russian military is killing Ukrainian prisoners.

Macron's statements: a shift to proactive counteraction to Russia, or an element of political game?
Foreign policy statements by French President Emmanuel Macron about the possibility of sending NATO troops to Ukraine have had a significant impact on the nature of Ukrainian political discourse. Of course, after two years of full-scale Russian aggression, all such statements are perceived by Ukrainians with a great deal of skepticism. At the same time, this is something that allows us to look at the situation from a different angle in the context of the Armed Forces' major problems with receiving assistance from the West at this stage. It is clear that any format of attracting Western troops to be deployed on the territory of Ukraine could serve as an additional incentive for the Ukrainian armed forces to plan their defense and repel Russian aggression. At the same time, everyone in Ukraine remembers that European leaders have previously demonstrated their unwillingness to make important decisions, which also affects the perception of any of their statements.

Ukraine is currently experiencing one of the most critical moments in its defense against Russian aggression, as military pressure on Ukrainians is only increasing, the Russian regime's allies are only increasing supplies of artillery and other means, while Ukraine's partners are only constantly hesitating and looking for political problems to explain why the necessary resources cannot come to Ukraine right now but must come later.

Under such circumstances, any specific means designed to help Ukraine counter Russian aggression can be perceived as an important resource and tool for achieving the final result.

At the same time, if nothing goes further than loud words now, it will only deal a greater blow to Ukrainian society, which has been living in a state of constant expectation of negative consequences for itself for two years. That is why any foreign policy statements about Ukraine should be taken as seriously as possible.

Ukraine needs huge resources for reconstruction and a significant part of the funds will have to come from domestic sources
The gloomy prospects for external financing exacerbate not only the problem of the state budget deficit and the risk of a balance of payments deficit, but also the issue of Ukraine's public debt.

We have already written about this problem in previous posts, but now it is necessary to consider it in more detail.

Recently, U.S. Senator Lindsey Graham said that the U.S. should not provide aid to Ukraine "for nothing."

In his opinion, it is worth providing funds on credit (it should be noted here that 60% of the funds provided to Ukraine in 2022-2023 were already loans).

Moreover, these should be not just "blank loans" but "secured loans".

According to CBS News. Graham stated: "I want to turn the aid package into a loan, and that makes sense to me... We have a $34 trillion debt. Ukraine has minerals, it has a lot of resources."

And this is not only Graham's position, as he said: "This is Trump's idea. If it is adopted, I think we can get a lot of votes in the House and Senate."

In other words, if Trump wins the US presidential election, this position could become dominant in the United States.

At the same time, Ukraine, which has found itself in a classic geopolitical force majeure, hopes for a more loyal attitude to its debts from its creditors.

After all, the parameters of the country that took on these debts have changed dramatically. First of all, it is minus 6 million Ukrainians who either ended up abroad as refugees or in the occupied territories. This is almost 16% of consumers, taxpayers, and employees, many of whom will not return to Ukraine in the coming years.

In addition, significant territories are occupied and their de-occupation is also a matter of time. Russians have destroyed a huge number of infrastructure and other economic facilities, as well as social assets and housing stock. All of this will require huge resources to rebuild, and Ukraine will have to find a significant part of the funds from domestic sources.  

In fact, the issue of restructuring and writing off part of the public debt is quite easy to resolve. Almost 80% of the $145 billion in public debt is either domestic government bonds or debt to international financial organizations and allied countries. Domestic government bonds are largely debt to the NBU and state-owned banks. Domestic debt needs to be restructured for a longer period without writing it off, for example, 15-20 years. Restructuring is done by replacing outstanding bonds with new bonds with a longer maturity. This was already successfully done in 1998 during the crisis, when instead of government bonds, conversion bonds were issued. The portfolio of government bonds owned by the NBU also needs to be restructured - this process is called reprofiling, and we have experience in this. 

The second part of the debt is to international financial organizations and partner countries. For Ukraine's partners, writing off $55 billion is equivalent to 0.1% of their annual GDP. 

The remaining 20% of the national debt is Eurobonds. They do not play a critical role, although they are expensive to service. What is possible here is a partial write-off (50% of the debt), partial restructuring (the other 50% for a period of 10-15 years) and a reduction in the coupon rate from 6-7% to 3%. Yes, this is not a market rate, but it corresponds to Ukraine's real capacity to service its debt.

In 2024, it is possible to systematically improve Ukraine's debt history by writing off $40-50 billion in debt and restructuring $70 billion in debt for 15-20 years. In this case, the cost of servicing and repaying the public debt would fall several times, and the ratio of public debt to GDP would be less than 50% (the critical level is over 60%). In this case, the amount of public debt would be reduced to $70-80 billion. 

Can Ukraine apply for IMF debt relief programs, in particular, the Heavily Indebted Poor Countries Initiative (HIPC initiative)? 

According to the IMF, "the HIPC Initiative, approved in September 1996, is a comprehensive, integrated and coordinated approach developed jointly by the IMF and the World Bank to address the above-mentioned external debt problems in heavily indebted poor countries".

IMF analysts say that "within the framework of the Paris Club, procedures for collective renegotiation of official bilateral debt have been developed since the 1950s, when Argentina approached its creditors bilaterally. 

Between 1956 and 2011, 426 agreements were concluded with 89 different countries, and the amount of debt processed under the Paris Club agreements amounted to $563 billion. The permanent secretariat of the Club is organized under the French Treasury.

Over time, the Paris Club granted more and more favorable terms for debt rescheduling to low-income countries. The degree of reduction for commercial claims obligations gradually increased: Toronto terms (1988 - 33.33% debt reduction); London terms (1991 - 50% debt reduction); Naples terms (1995 - 50-67% debt reduction); Lyon terms (1996 - 80% debt reduction); Cologne terms (1999 - 90% or more reduction when required under the HIPC Initiative). 

In October 2003, Paris Club creditors adopted the "Evian Approach" to better tailor their approaches to the needs of debtors not covered by HIPC. 

Can Ukraine qualify for inclusion in the HIPC debt relief program? Let's make some calculations. The public debt has already reached USD 145 billion, or 85% of GDP. For the calculation, we need the net present value (NPV) of debt flows. Given that a large part of our debt is short- and medium-term, the NPV will not differ dramatically from the nominal value. Ukraine's exports will now be at $50 billion, while the budget revenues (without international financial assistance) will be at $40 billion. The threshold value of NPV to exports in Ukraine will be more than 240% (and 150% or more is required for debt relief under the IMF methodology). The threshold value of NPV to budget revenues is 250%. 

That is, Ukraine fully meets the criteria for debt relief under the HIPC procedure. It just needs to be initiated. 

Moreover, Ukraine can initiate the adoption of a new "Kyiv Protocol" on debt relief for countries affected by war at the international level. This could be a global initiative of the President of Ukraine at the level of such structures as the OECD, IMF, WB, Paris Club of 19 countries, and G20. 

For example, right now India is developing a new protocol on debt relief for poor countries on behalf of the G20 and the IMF.

The "Kyiv Protocol" could include the following parameters: writing off 100% of Ukraine's debt within the Paris Club of Creditors; writing off 50% of the debt within the London Club of Creditors; reducing the debt service rate on Eurobonds to EURIBOR and LIBOR, but not higher than the current service rate. 

In total, Ukraine's debt burden should be reduced to at least 50% of GDP, i.e. to $80-85 billion in equivalent. 

Why is the issue of debt relief so important for Ukraine's future? Large debts are equivalent to low spending on social capital and low spending on stimulating the economy, including critical infrastructure.

Such a country will not be interesting for investors. That is, after the war, Ukraine will not have the two most important drivers of growth: neither domestic effective demand nor capital investment. 

And Ukraine has no demographic or innovative growth factors yet. 

For Ukraine, low growth rates after the war mean a slow dying of the country. That is, it is a question of the nation's survival, not just a conversation about money.

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